Debt instruments, funding costs remain in focus as Reits report Q1 earnings

HIGHER cost of funding is likely to continue to weigh on distributions for Singapore-listed real estate investment trusts (S-Reits) in the upcoming reporting season. 

Analysts told The Business Times that operational performance for Reits is expected to stay resilient, but distributions per unit (DPU) are likely to remain under pressure from financing costs.

They remain focused on debt instruments on Reits’ balance sheets to monitor the impact of the higher rate environment.

Darren Chan, senior research analyst at Phillip Securities Research, said that Reits are still expected to be hit by higher interest costs, which would result in a year-on-year distribution decline, barring any capital top-ups. 

Meanwhile, Maybank analyst Krishna Guha said the high cost of funding will continue to be the key point to observe for the sector as S-Reits start releasing their business updates and results for the period ended March this week.

“Key focus may be on debt due to mature this year or next year and perpetual securities (perps) with call date in this period,” he said. 

Other analysts are also keeping a close eye on debt instruments in the capital structure of Reits.

DBS analysts Dale Lai, Derek Tan and Amanda Seah said in a recent report that upcoming perps resets in 2024 are an “increasingly pressing issue” as interest rates remain elevated.

“In today’s high interest rate environment, perps as an instrument are less attractive and could hurt distributions when they reset,” they said.

“We estimate this could erode DPUs by up to 4 per cent (in FY26) for selected S-Reits. This is a potential hurdle that most S-Reits and investors will need to keep watch on.”

The analysts noted that S-Reits currently have about S$4.2 billion of perps outstanding. Reits that employ such instruments include CapitaLand Ascott Trust, Paragon Reit and Lendlease Global Commercial Reit

“We believe most S-Reits will redeem the upcoming perps, though funding strategies will depend on their capital structure, financial flexibility and headroom,” they said.

Veteran Reit investor and chairman of GCP Global Gabriel Yap noted that the performance of the sector in the first quarter would likely be similar to previous quarters, and remain “lackadaisical, weighted down by higher interest costs on higher or same gearing levels”.

While most of the Reits will be reporting quarterly updates in the upcoming results season, the Reits sponsored by Mapletree and Frasers Property will be issuing their full-year and half-year results, respectively.

Chan said: “We are expecting improvements in operational performance to be offset by higher interest costs, resulting in flattish DPU year on year.”

Mapletree Pan Asia Commercial Trust (MPACT) will announce its earnings on Apr 24 with Mapletree Industrial Trust coming a day later on Apr 25.

“Mapletree Reits will be doing full-year valuation, so there will be some colour around cap rates across various sub-sectors and geographies,” Guha said. “We expect cap rate to expand, though it may be moderated by rental growth assumptions.”

GCP Global’s Yap said he will be watching out for valuations of overseas assets, and the impact of higher cap rates.

He is also keeping an eye out for the performance of Frasers Centrepoint Trust (FCT), and whether incremental distribution income is able to offset the dilution from issuance of additional shares to finance the stake at Nex.

FCT will announce its results on Apr 25, while Frasers Logistics & Commercial Trust and Frasers Hospitality Trust will report their earnings on May 7 and May 9, respectively. 

Guha said: “Frasers’ Reits will also be providing more disclosures (on) operational performance such as rent reversions for retail and industrial assets and country level RevPARs (revenue per available room) for hotel ops. This will be of interest. We expect these operational stats to show improvement though there may be some moderation on a sequential basis.” 

The reporting season kicks off on Monday (Apr 15) with Sabana Industrial Reit reporting its Q1 business update after the close of markets. This will be followed by Keppel Pacific Oak US Reit on Apr 17.

Chan from Phillip Securities said he is keeping an eye out for the performance of US office Reits, to assess whether leasing volumes are improving, and whether they will face any issues with their upcoming refinancing.

Other Reits reporting their earnings this week include CapitaLand Integrated Commercial Trust and Keppel DC Reit, which will report their respective Q1 business updates on Apr 19.

More counters will release their results the following week, including CapitaLand Ascendas Reit on Apr 22, Keppel Reit on Apr 23 and Suntec Reit on Apr 25.